UK insurers are unlikely to significantly increase their investment risk in the near term, despite the impact persistently low interest rates are having on their earnings, Fitch said today.
In a note, the ratings agency said it expected the proportion of risky assets on UK insurance firms' balance sheets to remain 'broadly stable'. In some cases they could decline as new European rules aimed at limiting insurance risk, Solvency II, come into force.
In recent years, it said, 'most' major UK life insurers have reduced the proportion of risky assets they hold relative to their own equity. 'UK insurers have also written less guaranteed business than those in other countries, reducing their need to obtain high returns to make guaranteed payments,' it added.
But Fitch noted that persistent low interest rates were having an impact on insurers because they both limit the returns they can generate on investments and can also increase their liabilities.
The Financial Services Authority has recently highlighted concerns that insurers may make riskier investments to increase yields.
Despite this, Fitch expects the trend towards reducing risk ratios to continue because of the higher risk charges likely to be introduced as part of the new Solvency II rules governing the European insurance industry. The exact impact of this will depend on when the rules are implemented, it added, noting recent concerns over slippage in the 2014 goal for the legislation to take effect.
It warned: 'If insurers did start to increase their holdings of risky assets, we would particularly be on the lookout for unusual investment strategies, such as those involving esoteric instruments and less liquid investments, or any increased concentration by name or sector.'
